Gazprom picks France's Total as development partner for Shtokman gas field

The European Parliament adopted Wednesday a report “On Prospects for EU Domestic Market of Natural Gas and Electricity” by a majority of votes. The document effectively puts a ban on the purchase of EU energy infrastructure by third countries safe for cases “in which a third country expresses readiness to reciprocate.” The move is seen as an attempt of the European Union to create legal obstacles against Gazprom’s plans to expand into EU markets. It is obvious that the new legislation will make the plans of Russia’s state-run natural gas monopolist conditional on the prospects for liberalization of the Russian market of natural gas. However, Gazprom has managed to score a significant success in promoting its own model of gas relations against all odds. It was reported on Thursday that Gazprom had chosen Total as a partner for the first-phase development of the Shtokman gas field.

Gazprom picks France's Total as development partner for Shtokman gas field

The European Union has been actively trying to liberalize its market of natural gas for a long time. Aside from dealing with issues related to the formation of a competitive EU market of natural gas and price reduction, the European Union also had to resolve another problem that came to light recently – the EU’s excessive dependence on Russia's giant Gazprom with the dramatic changes between Russia and the CIS countries taking place on the background. We might as well remember an untimely “gas war” that broke out between Russia and Ukraine at the beginning of 2006. It was the year when Russia held presidency in the G8 and offered the West a brand-new model of energy security based on the strengthening of mutual dependence, “asset swapping” and long-term contracts. Gazprom proposed to carry out guaranteed natural gas supplies as the supplier and the customer would become increasingly dependent on each other. Gazprom’s model and that announced by the EU in 1998 were complete opposites. The problems arising from different opinions the parties held on the future of Russia’s natural gas supplies for Europe have become political, by and large. Europe does not trust the Putin regime, and therefore seeks to minimize the political risks.

The point is that the liberalization of Europe’s energy market is laboring under difficulties. There is a heated debate going on. Some politicians and economists are in favor of the liberalization, others are completely opposed to the plans. Meanwhile, European energy companies are growing larger; they take over competitors and become major players on the world’s energy market. For Europe, the market liberalization is still a dream to come true, whereas Gazprom keeps buying European assets which are secondary yet important links for taking control over the natural gas market in Europe. On the other hand, Russia’s domestic market remains mostly closed to European companies; its infrastructure is closed to foreign companies by definition, and foreign participation in developing Russia’s gas fields is limited for political reasons. Gazprom is ready to cede a stake in production assets to a strategic foreign investor on condition that Russia’s state-controlled natural gas monopolist owns a controlling stake. Moreover, Gazprom asks for infrastructure facilities in return – the latter condition has been a frequent stumbling block in talks of late.

It was reported on Thursday that Gazprom had picked the French group Total as a partner for the first phase of development of the Shtokman field. “Gazprom has decided to choose a foreign partner for implementation of the first phase of development of the Shtokman field. The French company Total will be a development partner of Gazprom,” said Gazprom CEO Alexei Miller. The parties plan to sign the agreement on Friday. “Under the plan for the fist phase of development, the field will produce 23.7 billion cubic meters of natural gas. The first supplies via a pipeline will commence in 2013, with the beginning of LNG supplies slated for 2014,” Miller said. A special company will be set up to design and finance the first phase of the project and build facilities. Subsequently, the venture will own the infrastructure of the first phase. “Gazprom will own 75 percent of the company, Total will own 25 percent,” Miller said.

He added that other firms could still get stakes in the project. In any case, Gazprom will own at least 51 percent of the above company and 100 percent of a company which will hold the license for Shtokman and own gas produced from it, said Miller.

The latest developments mean that Russia’s natural gas monopolist finally agreed to allow foreigners to development projects despite recent statements by Gazpom’s officials and the Russian government. In actuality, Gazprom could not have done any other way. The development plans for the Shtokman field would have been put on ice had Gazprom refused to cede a stake in the project’s infrastructure to a strategic investor. Oil majors generally dislike taking part in projects under the terms of a service contract. However, it is still unclear what exactly Gazprom would get in terms of Total’s assets.

The news on the successful conclusion of talks on Shtokman is a clear sign of progress Gazprom is making in an attempt to pursue its asset swapping policy, which contradicts Europe’s plans for natural gas market liberalization. The move may prompt the EU to take fresh steps in order to resist the expansion of Gazprom in Europe. EU Parliament Vice President Alejo Vidal-Quadras stressed the point that Europe was extremely dependent on energy supplies from Russia and Algeria. “Russia’s Gazprom should be able to buy infrastructure in Europe only if European companies get access to the Russian market,” said Vidal-Quadras, in a recent interview. According to The Guardian, the proposed measures would forbid third countries including Russia to bid for the purchase of units of the EU’s major energy companies in case the latter should undergo restructuring in accordance with the law on free competition of the EU energy market.

The EU is actually trying to take preventive measures to keep Gazprom from buying gas-distributing networks in Europe. However, Gazprom is getting into difficulties even without the new legislation in place. Gazprom’s attempts to buy Centrica, the British gas-distributing company, ended in failure. The British government even discussed the possibility of changing the law on mergers to block up the deal. According to information obtained by The Guardian, proposed measures would prevent private companies and hedge funds from buying gas and electricity networks of major energy companies unless the potential buyers comply with strict investment requirements as defined in the key proposals of the European Commission. The above proposals will be obligatory for all member states of the European Union. In its turn, the European Commission is stepping up its liberalization efforts on the EU natural gas market while proposing measures for breaking up Europe’s large energy companies, thus giving them an impetus to put on sale their electricity networks and pipeline systems. The opening of retail natural gas and electricity markets to local costumers on the 1st of July preceded the move. The European Parliament is expected to adopt the EC proposals by a majority of votes. The proposals should take shape of a bill by September.